Welcome and thank you for standing by. At this time, all participants are in listen-only mode. Today’s conference is being recorded. If you have any objection, you may disconnect at this time. Now, I will turn the meeting over to our host Ms. Patricia Murphy, Vice President of Investor Relations. Ma’am, you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I’m here today with Martin Schroeter, IBM’s Senior Vice President and Chief Financial Officer. I’d like to welcome you to our fourth quarter earnings presentation. The prepared remarks will be available within a couple of hours, and a replay of the webcast will be posted by this time tomorrow. I’ll remind you that certain comments made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company’s filings with the SEC. Copies are available from the SEC, from the IBM website, or from us in Investor Relations. Our presentation also includes certain non-GAAP financial measures, in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end of the presentation, and in the Form 8-K submitted to the SEC. Now, I’ll turn the call over to Martin Schroeter.

Thanks, Patricia. Let me start by saying we’re pleased with the progress we made again this quarter. We delivered revenue of $22.1 billion, operating net income of $4.7 billion, and operating earnings per share of $4.84. As we get in to our results, you’ll see that our fourth quarter and full year performance reflects the transitions in our business as we address the significant shifts in our industry, as well as some of the cyclical challenges of the global business environment. So as always in January, I’ll start out with some comments on the year, show you the progress we’ve made in our transformation, discuss the details of the quarter, and then wrap up with our view of 2016. For the full year, we delivered nearly $82 billion of revenue, and $14.7 billion of operating net income and our operating earnings per share were $14.92. As we’ve said, this transformation will play out over time, and with revenue down 1%, for the second consecutive year we’ve had modest improvement in our year-to-year revenue performance, excluding the impact of currency and divestitures. I’ll comment on year-to-year revenue performance on this basis throughout. Our strategic imperatives continued strong performance, up 26% for the year. This now represents 35% of IBM’s revenue. Our profit and margin reflect our portfolio actions as we shift to higher value, as well as the level of investments we’re making to drive our transformation. We generated over $13 billion of free cash flow, which is up year-to-year. This is 98% of our GAAP net income, in line with our expectation that free cash flow realization will be in the 90s. A couple of years ago, we laid out our strategic imperatives around big data and analytics, around cloud, and around mobile and security, the areas where our clients…

Thank you, Martin. Before we begin the Q&A I’d like to mention a couple of items. First, we have supplemental charts at the end of the slide deck that provide additional information on the quarter and year. And second, I’d ask you to refrain from multi-part questions. Operator, let’s please open it up for questions.

Thank you. At this time, we will begin to question-and-answer session of the conference.[Operator Instructions] First question is from Toni Sacconaghi from Bernstein. Sir, you may ask your question.

Yes, good afternoon, Martin. When you began 2015 you talked about software as really being kind of the pivot for whether you might hit the high end of your guidance range to the low end of your guidance range. And you anticipated or hoped that software would improve in the second half. What we saw was the opposite is that software decelerated significantly in the second half of this year. And I’m wondering, if you could reflect on: A) what happened and B) while there should be some improvement next quarter because of less transaction and I gather the weather channel will be added into that division. How do we think about software in 2016, should we be expecting a business that’s down low single-digit at constant currency again? And perhaps you can talk about kind of the forces that play both again what happened in terms of deterioration in the second half and how we should think about the forces that play in 2016? Thank you.

Sure thank you, thanks Toni. A few comments on software, so as we said in our prepared remarks, the deceleration third to fourth really was driven by this – by the mix shift and the continuation of the transaction closing rates that we saw in September. So we talked about – coming out of September we talked about a slower rate of closing in some of our larger deals and that’s what we experienced as well in the fourth quarter. And as I mentioned in my prepared remarks, because of the mix shift alone we see an improvement and as you point out the weather company another acquisitions by the way to the extent that they are – have software in them they will obviously bolster that growth rate. A few things, I think are important to note within software. First, as we said in our prepared remarks and the phenomena is really no different in the fourth and what we’ve seen all year, our annuity business within the software business. So that’s about 70% of our overall software stream. Our annuity business continues to grow. So that has a service in it, it has our subscription and support business in it as well, so that continues to grow. And then outside of our largest clients and this is a phenomena that we’ve been talking about, outside of our largest clients where they don’t have as broad access to our software portfolio, we continue to see growth as well, both transactionally and they’re obviously part of the asset service stream. Within the large clients as I mentioned earlier and as we talked about in our prepared remarks, we provide flexibility, it gives them – it gives our clients an ability now to manage their projects and they deploy maybe differently…

Thanks, Toni. We can go to the next question please.

Thank you. Our next question is from Katy Huberty from Morgan Stanley. Katy, you may ask your question.

On a high note in servers both mainframe and power, how are you thinking about growth rates in 2016 as you move into the latter half of the cycle and how might that influence gross margins? It looks like it had an intact to the fourth quarter? Thank you.

Sure. Your question actually cut off a little bit. I think you said, finishing at a high note in the fourth quarter, I’m going to assume that was the question, Katy. So, I’ll answer for mainframe and for power and how we’re entering 2016. So first on mainframe, another very good cycle in mainframe, so as you know we announced that in the first quarter, the growth rates have been pretty consistent throughout, that we doubled in the first, growth in the second, good third quarter, again fourth quarter we finished at about 20% year-to-year of constant currency. And the adoption rates are consistent with what we would expect. So for the full year the mainframe is up 35%. And as is typical in the mainframe cycle, margins in the announcement year tend to be a little bit lower. And we will see margin improvement as we get to the latter half of the – or the latter part of the mainframe cycle in 2016. From a power perspective, well I’ll tell you, the power team has done a wonderful job of transforming a business. And I think it’s a really good example of how IBM transforms its businesses. So since as we put in the prepared remarks we have not grown since 2011 and in 2015, we grew each of the four quarters in the power business, finishing the fourth at plus eight. And I think what’s underpins that and what’s important to note is we continue to serve a decline in market for part of that Power business, the UNIX market is declining, it has been declining, but it’s still high value and it’s still serves a very important role in our clients environment and does some other most important works. So it – continues to be an important market place. But at the same time, the team has been able to reinvent the platform, make it relevant in the Linux space so we’re seeing very good Linux placements in Power and the applicability of that POWER8 platform in Cloud spaces for instance and running other ERP type missions has been a terrific boost to the overall growth rates. And then keep in mind that we’ve also – the team is also put in play from a business model perspective, the OpenPOWER Foundation, which is an intellectual property play. So that will also boost margins. So the Power, again the Power team has done a terrific job of repositioning a product which had a very strong acceptance and that’s delivering high value in a declining market space into now a business that has grown four quarters in a row with a lot of leverage from here as our OpenPower consortium members start to deliver their own systems into that Linux space.

Thanks, Katy. Rovena, can we go to the next question?

Thank you. Our next question is from Mr. Tien-tsin Huang from JPMorgan. Sir, your line is open.

Great. Thank you. Good afternoon. Just wanted to ask on services if we can expect some improvement in growth in 2015 given the backlog chime you talked about that Martin. And also your confidence in services margin, expansion in 2016, because, if I heard correctly, no workforces were down saying in the fourth quarter. Is that a signal that you’re on a good place with your offshore delivery right-sizing? Thanks.

Thanks Tien-tsin. So a couple of comments and I’ll disaggregate, I guess I’ll talk about GTS and GBS separately. So first, we did, as we said in our prepared remarks, we finished with a very good backlog growth of 1% ex-currency. Now that is $121 billion book of business. So even, 1% growth is a lot of additional business that we feel quite good about the backlog, we’re entering with – and even when we look at the signings progress throughout the year, for the full year GTS, global technology services grew signings and GBS grew signings and in fact GBS exited fourth quarter with double-digit signings growth in the quarter. So a very strong return to growth which put them into growth for the year, so from a backlog perspective and from a relevance of our offerings perspective, I think those signings numbers suggest that there are substantial deals out there, there are deals that play well to – our high value view and our ability to move our clients into hybrid environment and our ability to continue to grow – to continue to grow that backlog. From a margin perspective in GTS, keep in mind that at a total GTS level we have very good margins. But we also have a maintenance business in there which has a lot of margin within it. When you pull out the maintenance margin and just look at DSO business, we still see opportunities to expand margins in that area. And keep in mind, with regard to workforce rebalancing while we didn't have a charge in the fourth. We’ll continue to remix our skills and we'll continue to move our work to where global delivery centers can best do it. So that will not be a year-to-year impact in the first quarter.…

Thanks, Tien-tsin. Let's go to the next question please.

Thank you. Our next question is from Brian White from Drexel. Sir, you may ask your question.

Yes, Martin, if we look at the different business segments in 2016, what businesses do you think have an opportunity to actually grow in constant currency and what businesses have an opportunity to expand margins in 2016? Thanks.

Sure, Brian thanks. So a few comments, I think what we're going to see in 2016 is really the phenomena that we’ve been talking about now for a couple of years which is our clients are investing heavily in these growing areas of cloud of analytics, of mobile, social and security and as you saw in the full year of 2015, we grew that 26%, right now it’s 35% of our business. So our client discussions today are still built around those that shift into those parts of the business. We’ll also see a continued discussion around parts of a business where they’re focused on us delivering productivity to them, now productivity to your clients means reduced revenues for us, but that’s the phenomena we’ve been in. And so when we look at 2016, I think we'll see a continuation of both of those. As you know in 2015, we ended the year with a revenue base it was about 1% smaller than it was the prior year given those two dynamics strong growth in the strategic imperatives and delivering productivity to our clients in the rest. So that probably – that trend is what we’re going to see now the mix obviously be different the strategic imperatives are representing a larger part of the business than they did in then where they started in 2015, but that trend will continue. On a segment-by-segment basis, GTS has grown now three quarters of the year and as I said with pretty good backlog growth and we think that trajectory continues to hold. GBS improved in the fourth, relative to the third, so a sequential improvement in its year-to-year growth rate. But we’re not relying on that bouncing back rapidly as we know we’re going through a transition there, and we want to get through that transition as rapidly as possible. But having said that, about half of their business now is in strategic imperatives, but half isn’t so we’re going to continue that transition. The systems business will continue to see momentum as I mentioned in the power business where the team has done a terrific job of repositioning the platform. But the mainframe is coming into the back half of the cycle and so we won’t see the same growth levels that we saw. And then software as I mentioned in response to the prior question that transactional mix will not play as bigger role in the first quarter as it did in the fourth and so obviously we’ll see how we transition through the year, but bolstering that software growth will also be some of the acquisitions. So I think there are discussions with our clients, as I started with the discussions with our clients are going to reflect these two halves of our business which is discussions around moving to the future and the other discussion are helping them drive productivity.

Thanks, Brian. Rovena, can we go to the next question please?

Sure, Ma’am. Thank you. Our next question is from Steve Milunovich from UBS. Sir, you may ask your question

Great, thank you. Could you talk a bit about free cash flow you said free cash flow will follow profit. Does that literally mean you expect about $13.50 in free cash flow per share? I would think maybe not given that you had a $3 billion positive swing on the cash taxes and maybe you could go through cash taxes, pension, working capital, CapEx, some of the swing factors and where you think that I’ll come out on free cash flow this year.

Sure, Steve, and you’re right. We – what my reported remarks or my remarks we’re not intended to say, we’re going to do $13.50 in free cash flow per share. That was not the intent. But what I – we do want to say is that our free cash flow performance in absolute terms will follow the profit performance. So a few comments, first we did have a year-to-year reduction in our cash taxes. But keep in mind that in 2015 our cash tax rate and our book rate were pretty similar. And so the relationship you see in 2015 is the right relationship, yes, year-to-year there was a benefit, but that’s because we had a very high cash tax rate in 2014. So the 2015 relationship, which we – where we produced 98% of our debt net income was the realization per free cash flow is the one we’re talking about for 2016 as well we see that relationship. Now within that – the guidance that $13.50 – at least $13.50 we translate the free cash flow kind of in the $11 billion to $12 billion range. And within that we have assumed some growth in CapEx for the year, as we continue to drive our cloud platform and our investments in there and our system, our services business. The operational performance that’s embedded within that obviously will have an impact. Then the rest and I’ll give you a few pluses and minuses here. The rest kind of translates to basically flat. So really is the profit performance. So we’ll have slightly higher income tax payments as an example. We’ll have a less – a little bit of a less benefit of working capital. We have slightly lower pension payments, we have slightly lower workforce rebalancing payments assume. So you put all that together and what I meant by free cash flow will follow profit is that free cash flow at $11 billion to $12 billion of free cash flow roughly translates to what we see in profit performance at that at least number. Bear in mind that, as we talked about on profit. There’s about $1.3 billion impact of profit year-to-year from currency. And while the dynamics are a little bit different in cash flow that does translate roughly to the impact to free cash flow as well. So what you’re seeing in here in our guidance, which was a big impact from currency, is also a big impact in free cash flow for next year.

Thanks Steve. Rovena, can we go to the next question please?

Thank you. Our next question is from David Grossman from Stifel Financial. You may ask your question sir.

Thank you. So Martin, if I read the press release right, it said the strategic imperatives decelerated through about 16% growth year-over-year at constant currency. That’s obviously down from where you were in the first three quarters. What were the primary components driving the deceleration? And what would be a reasonable target for growth in those strategic imperatives in 2016?

Sure. Thanks, David. So a couple of things, as we said for the year we were at – we had very good growth of $29 billion. What we saw in the quarter was about $1.7 billion sequential increase in strategic imperative revenue. And that’s better than it was first to second, better than second to third. So we did see kind of a typical seasonal sequential improvement in our strategic imperatives from third to fourth. When we talk about our strategic imperatives at Investor Day, we said they’ve been growing kind of in this uncanny rate of 18, 18, 19, 19, 19 very steady over the last few years. And we said that our model assumes that we will transition to those areas at a similar kind of rates, I think we had 15 to 19, think of it as high-teens if you will. As we went through this year and as we said at the beginning, first quarter we printed over 30, and as we said we’re not relying on that throughout the year. So we finished the year on a full-year basis, now relative to that 15 to 19 range, where we finished at 26% growth year-to-year. So we’re ahead of what we expected. We’re transitioning into those areas faster than we had expected back at Investor Day. And so we finished at 35% of the revenue streams. And again in Investor Day, we said by 2018 we get to about 40 or at least 40. We think we’re in good shape to make it there, but 26, we’re pleased with, because we’re transitioning faster than we have over the last four years or five years. And again, it’s on a higher base. So we’re pleased with the progress we’re making and continuing to grow these strategic imperatives.

Thanks, David. Can we go to next question please?

Thank you. Our next question is from James Schneider from Goldman Sachs. You may ask your question.

Jim, we can’t hear you if you are on mute.

Thanks for taking my question. Can you hear me now?

Yes.

We can.

Okay, sorry. Just in terms of the software performance during the quarter, can you maybe talk about the impact and quantify the impact you saw from the ELA, because there is no weakness in Q4. And then can you maybe give us some kind of bracketing for 2016 about what impact you expect from ELAs to the extent you can see it going forward over the next couple of quarters?

Well, sure, Jim. So a few things, one, and I’m not saying you implied this, but ELAs are very – ELAs are Enterprise License Agreements for all of our listeners. ELAs, Enterprise License Agreements are very powerful – a very powerful way for our clients to consume our software, gives them broad access to the portfolio we offer like our middleware platform, which is quite valuable to them as they think about their hybrid cloud environment. So we do more ELAs, more Enterprise License Agreements, we did more in 2015 and we did in 2014. We haven’t seen a dramatic change in the length of time our clients commit to the platform for those. As I mentioned on an earlier question, our renewal rates for the subscription and support that underpins their deployment of those continues at very high rates. So the ELA structure is one that we think is – and our client think as a terrific way to consume our portfolio. Now parts of our portfolio will continue to – will continue to be consumed on an EL basis – ELA basis. And as you saw us, maybe you saw us, earlier this year we moved parts of our middleware portfolio into our cloud business. That’s really a reflection of the importance our middleware places in these hybrid cloud environment. So some of that could get start to get consumed in different models from ELAs that – maybe they get consumed on a more individual basis, maybe they get consumed on an as-a-Service basis, but the ELA construct remains quite powerful. As I noted earlier, the big difference we saw was in the breath of the access that some of our clients have and they – because they don’t have the visibility they need to their demand environment or because they don’t have visibility to the most immediate need they might have, they’ll move around the deployment of those licenses into different areas. But again with our renewal right staying high, we know that they are still consuming those. So the ELA construct quite powerful. It’s the right way I think for our clients to consume our software and the right way to give them flexibility to deploy it.

Thanks, Jim. Can we go to the next question please?

Thank you. Our next question is from Lou Miscioscia from CLSA. You may now ask your question.

Hey thanks. Hey, Martin, Lou here. So just sticking on the software, if you go back to the second half of 2014 when the flexible pricing started to hit software growth in a meaningful way and then obviously it hit it all through 2015, when are we going to get the grandfathering position where we can get half the flexible price in which – I know that when we talked about this before you’ve said that it was the right thing to do for the customer. But customers want everything for free and I assume you are not trying to move through an open source type of model. So I’m just wondering when we can get passed and what else you can do to try to get software growth in your most profitable area in the company?

Sure, Louis. So a couple of things that I’d say. First, this is the right thing to do to offer our clients flexibility as they try to get insights into their demand environments and as they try to deploy their projects. So it is absolutely the right thing to do. We felt that way when we started talking about, and I think it’s still the right thing to do. Again, what’s important to us is that they commit to the platform, number one. Number two that they are actually deploying the software and we see that as I mentioned in our renewal rates where as long as our renewal rates are staying high we know they’re using our software. So all of that is good for the model. And in the long-term, we think that we will benefit from all this. Now, bolstering our software growth this year and our software performance this year will be some acquisitions we made, so those will certainly help as we go through the year, but this is – again, it’s the right thing to do for our clients. And as we continue to move our software into a broader and broader ecosystem, we’ll continue to see growth in those clients that that don’t have access to so much, so that will continue. But from an overall perspective with the acquisitions, which will help a bit, and again our renewal rates staying high. Over the long-term, this is a terrific business for us.

Thanks. We’ll go to the next question please.

Thank you. Our next question is from Keith Bachman from Bank of Montreal. Sir, you may ask your question.

Hi, many thanks. I also wanted to focus on the software area. I think on the last call you mentioned that Software-as-a-Service was a small part of your existing portfolio, I think around 5% of revenues. As you think about 2016, could you address how you see the growth of as-a-Service impacting your software both revenue growth and profitability? And more specifically, I don’t think we’ve gotten a specific answer on can you grow software in 2016 and will your margins be up down or flat? Thank you.

Sure, Keith. So, a few things. So, our SaaS revenue overall as a percentage of our total software business is still fairly small percentage, but it is growing and is growing quite well and we are always releasing new SaaS and acquiring new SaaS opportunities. So we see continued very strong growth in our SaaS portfolio into 2016. Now, it’s small and so relative to the total, it’s not going to drive a ton at the top-line, but over the long-term this will be a good economic model for IBM. Additionally, the new businesses we’re building have this strong SaaS component or as-a-Service component to them. So, Watson for instance is an as-a-Service offering. Our new Watson Health business has built heavily on an as-a-Service offerings. And other as well are moving into much more heavily weighted to our as-a-Service. So the as-a-Service fees, which is part of our overall as-a-Service exit run rate $5.3 billion has pretty good growth in it. In terms of profitability, we talked in our prepared remarks about continued margin expansion in 2016. And part of that quite frankly is going to be driven by additional volumes on our as-a-Service platform, that’s both Software-as-a-Service, infrastructure-as-a-service and our platform-as-a-service, our Bluemix property. So we will see as those revenues climb, we will see profitability in fact margin expansion out of those – excuse me as-a-Service properties. Within SaaS specifically, our margins and software are quite high while the move into a SaaS model is not accretive to margins in software. It’s not a big impact and it is accretive to margins and total IBM because we don’t have a lot of these SaaS properties. So, in 2016, we see margin improvements across our as-a-Service properties. Margins within SaaS specifically are accretive to IBM and we see that continue in 2016.

Okay. Thanks. Rovena, can we please take one last question?

Yes, ma’am. Thank you. Our last question is from Amit Daryanani with RBC Capital Markets. Sir, you may ask your question.

Thanks. Thanks for taking my question guys. I guess – Martin just in the strategic imperatives revenue stream that you guys have, you absolutely have a fair bit of scale over the margin right now, especially in Analytics and Cloud. Can you explain and talk about what do you think the margin and the free cash flow profile of the strategic imperatives assets is versus overall IBM, I think that would be helpful for people to understand? And then is the mix of strategic imperatives, software service and hardware change a whole lot from the last analyst have you guys talked about it?

Sure, Amit, a few things. I will answer the strategic imperative revenue part of your non-multipart question first. So on the strategic imperative revenue, I guess, the margin profile of that for the bulk of that business, which is focused on again Cloud or on our Analytics business, for a lot of that it just looks like our existing margin profile. So, where we’re selling our hardware, where we’re selling our software in for our clients to build an Analytic solution or for them to build their own Cloud then the margin profile looks like IBM’s. And as you know IBM is a high margin solution company. For the as-a-Service component of that, the margins are a little bit lower than that. Now a lot of that is because we don’t yet have the scale that we’d like or is it’s that differently we’re investing very heavily in order to drive that platform into our clients’ environment. And so, we’ll see margin improvement as we go into 2016 as we add more scale or take advantage if you will of the investments we have made. So in total the strategic imperative revenue over time will not have a dramatically different margin profile than what we see today. Again, because most of it has what is our margin profile today and the rest will continue to improve margins as our investment rates or as our revenue growth rates meet up and the capacity meets up with the investment rates. Relative to the mix, our software mix within our strategic imperatives is still at about twice as high as the rest, if you will, the rest of the business. So as you know in across services, hardware and software, if you look at the mix of those, the software piece in the strategic imperatives twice as high as what we see in the rest of the business. Now, it is down a little bit year-to-year as we in any given year or any given quarter, we have a different mix. We have certain programs that roll in, but it remains on – in total at about twice as high a mix as what we have in our core business. Thanks, Amit.

So let me just wrap up the call with a couple of comments, first, and I think we have been clear about this. We manage our business for the long-term. And in 2015, we made a lot of progress, a lot of very good progress in transforming the IBM company. You see this not only in the growth rate in the strategic imperatives, but importantly you see it in the big steps we’ve taken to address some of these new opportunities. We had an opportunity last year to invest quite a bit of capital. We bought 14 companies. We will continue to be acquisitive. So with the returns we’re seeing on our investments, we are more and more encouraged that the strategy is right and that we’re executing to transform IBM. In 2016, we’ll have our Investor Day in February. We’re going to talk more about both the transformation of IBM. We’re going to talk about how we present their information to the financial community to help understand IBM, particularly as we emerge as a cognitive solutions and Cloud platform company. I think it’s very important to understand what IBM is emerging as and again we’ll talk about that in our Investor Day. So, thank you very much for joining the call today, and we’ll see you in February.

Thank you for participating on today’s call. The conference has now ended. You may disconnect at this time.